Keynote address by Alexey Miller at the 22nd World Gas Conference, Tokyo

June 4, 2003

June 4, 2003

Dear Ladies and Gentlemen!

The new processes and phenomena in the world
community, somehow or other, bear an impact on the development of energy
systems and the prospects for the gas sector. In the new age, there is an
urgent need in essentially novel ideas and initiatives that would provide
adequate responses to the challenges mankind has to meet. I am sure this
Conference, held under the motto “Catalyzing an Eco-Responsible Future”, will
make a worthy contribution. In my presentation, I would like to outline the
Russian gas sector potential in resolving the world energy challenges.

World
consumption and production of energy resources in the 21st century

In the early 21st century, energy
consumption in the world regions shows sustainable growth. The tendency is due
to the world economic progress and the ever more essential role of energy
resources in the life of humankind. On the whole, energy consumption rose by 11
per cent over the past decade. The world energy balance has shifted towards
natural gas.

What are the prospects for the world energy
sector? Forecasting the world consumption of energy resources, most experts,
including Gazprom specialists, believe that the following basic tendencies will
be prevalent in the 21st century:

Increase in the overall demand for primary
energy resources.

Emergence and evolution of new regional
centers of energy consumption. Primarily, these are the Asia-Pacific and Latin
American countries that develop economies based on the active use of energy
resources.

Maintenance of the current dissemination
between generation and consumption of energy, which will promote intensive
development of the world and regional energy markets.

A shift in the structure of the world energy
consumption towards increasing the share of the most environmentally friendly
energy and renewable energy sources.

Discoveries and technological improvements
over the past decades attest to the fact that the world resource base, even
with respect to traditional mineral fuels, is sufficient for humanity not to be
afraid of “energy starvation”. According to the last World Oil Congress,
mankind is endowed with proven reserves of oil for approximately 40 years,
natural gas – for 67 years. For the past 10 years, the world proven gas
reserves grew by 25 per cent. That gives a chance to secure sustainable growth
in the gas sector.

World energy problems of today are associated
both with the economics and the environmental impact of energy resources
production and processing.

The future will pose a challenge of
transition to such a consumption structure where a noticeable role would be
played by non-fuel energy resources and technologies. At the same time, it is
essential to retain the investment load of the energy sector on the world at
the current level, i.e. no more that 4–6 per cent of the gross domestic
product.

What role will natural gas play in the global energy
structure? We believe that gas can take a leading
position in the world structure of the energy consumption in the coming decades
and maintain it till the end of the century. That can be asserted taking into
account considerable reserves of gas and its environmental effect. We are sure
that Russia
will play a leading role in that process.

Russia
as a leading gas power of the world

It is common knowledge that Russia is the world leader in
proven reserves of natural gas. In Russia, the energy sector is
developed on the basis of the State Energy Strategy adopted by the Government
of the country. In accordance with the strategy, natural gas in Russia will
retain its status as the principal fuel although its share in the overall
consumption of energy resources will be slightly reduced. Energy-saving plays
an important role in that process. There is a number of state programs to that
effect in Russia.

The steps taken by the leadership of Russia for
further reforms of the economy, for improving the pricing and taxation policy,
setting up a favorable investment climate, and establishing a competitive
domestic gas market, give ground to believe that the Russian gas industry will
intensely advance in the first quarter of the new century. For the period up to
the year of 2020, the main goals of the Russian gas industry are as follows:

Development of Yamal Peninsula
fields;

Bringing new fields in the Nadym-Pur-Taz
region (Western Siberia) into development with
that region remaining the principal source of hydrocarbons in the foreseeable
future;

Development of gas resources in the northern
seas shelf, primarily the Shtokman field as well as Sakhalin
shelf fields;

Development of reserves in Eastern Siberia
and the Far East;

Further development of the network of gas trunklines
and underground gas storage facilities.

Long-term development of the Russian gas
sector is a task for both Gazprom and the independent producers; the latter
include major Russian oil companies. Their role will be growing along with the
establishment of a liberalized domestic gas market.

Gazprom is the largest gas company in both Russia and the
world. Gazprom yields 8 per cent of the overall Russian industrial output and
provides one fifth of tax proceeds for the state budget. Gazprom’s share in the
world gas production is 23 per cent. The Company controls 20 per cent of the
world gas reserves.

In 2002, natural gas exports to Europe amounted to 129.5 billion cubic meters. To date,
gas supply from Russia
covers 26 per cent of overall gas consumption in Europe.
The Company holds the world’s largest portfolio of export contracts. The export
delivery contracts total over USD 250 billion.

The unique giant fields in Western Siberia
(Medvezhye, Urengoy, Yamburg, and Zapolyarnoye) serve as the basis for natural
gas production in Russia.

The Nadym-Pur-Taz region will stay as a basis
for Gazprom, although the first three aforementioned fields are already at the
stage of declining production. The Nadym-Pur-Taz area will annually provide 440–445
billion cubic meters of gas by 2010.

It so happened that the reserves of the
region have been oriented towards gas supply to consumers in Russia and Europe.
However, time dictates new large-scale objectives.

In 2001, the Company did much to specify the
investment strategy in the gas production for the next 20 years. Comparative
analysis revealed that most
promising is the development of unique gas resources of the Yamal Peninsula
with onshore proven reserves exceeding ten trillion cubic meters. Gazprom is interested in wide international cooperation for
implementation of development projects associated with that abundant gas
province, because it will have to be developed in complicated climatic and
geological settings, both onshore and offshore. It is scheduled that by 2020
Yamal annual production may reach 180–190 billion cubic meters.

Another important project may be development
of the immense gas condensate Shtokman field in the Barents
Sea.

To date, the total proven and estimated
reserves in Eastern Siberia and the Far East
amount to 6.5 trillion cubic meters. Russian eastern areas are at the stage of
large-scale geological exploration, but it is already possible to assume that
the existing reserves are sufficient to justify major projects for gas
production and use. We discussed that at the 20th World Gas
Conference in Copenhagen.
The core hydrocarbon resource base includes the fields in the Irkutsk Oblast and
Republic of Sakha
(Yakutia) where 70 per cent of the proven reserves are located, as well as the
fields in Sakhalin and Krasnoyarsk Krai. By
2010, the projected production will possibly reach 16 billion cubic meters at
the Kovykta field in the Irkutsk Oblast and 10 billion cubic meters in Sakhalin.

The basic principle of forming the gas market
in Eastern Siberia and the Far East will be
the competition on the market among alternative fuels, and the price for gas
will be shaped by balance between the supply and demand. By 2010, as new fields
are brought into operation, natural gas exports from the Russian East regions
to the APR may begin.

I would like to dwell specially upon the
development of Sakhalin reserves where a
number of PSA projects are currently carried out. As to Sakhalin
I and Sakhalin II projects, the period of talks and forecasting the development
of resources is already over. Gas production has already begun.

On the whole, by 2020 natural gas production
in Eastern Siberia and the Far East can reach
110 billion cubic meters, which will make the region actually a new real gas center
of the country. Gazprom has been authorized by the Government to coordinate the
establishment of a unified system for gas production and transmission.

Projects have been started to develop
non-conventional gas sources in eastern
regions of Russia.
In the Kuzbass
Coal Basin,
a project for production of methane from coal fields is underway. Research is
carried out to set up efficient technologies for gas extraction from gas
hydrate fields in permafrost rock areas.

Russia has constructed the world’s largest Unified Gas
Supply System. The total length of gas pipelines exceeds 150 thousand
kilometers. Gazprom is currently paying efforts to extend and modernize the
System. A system for monitoring and managing gas transmission processes has
been developed and steadily upgraded; it supports reliable, stable and
efficient gas supply both in Russia
and abroad.

The existing gas transmission system enables Russia to
interact with Central-Asian natural gas producers and promotes gas industry
integration among the CIS countries. In June 2002, Russia and Kazakhstan established KazRosGaz,
an enterprise for joint operation on the gas markets. In April 2003, Russia and Turkmenistan entered into a
long-term agreement on natural gas supply to the Russian market. That will make
it possible for Turkmenistan
to support sustainable natural gas exports and for Russia to get an additional source
of gas supply.

At the beginning of the new millennium, Gazprom continues developing projects for
construction of new trunklines in the West of the country. To be able to use
more efficiently gas resources of Russian eastern regions, Gazprom develops a
model for gas transmission trunklines. We intend to construct a number of gas
pipelines from the fields in Eastern Siberia and the Far
East to major regional consumption
centers. Thus, the Kovykta field can meet the demand for gas in the city of Irkutsk, and Sakhalin fields can cover the need for gas in
Khabarovsk and Vladivostok. Within the Sakhalin II project,
it is intended to construct oil and gas pipelines to the southern part of Sakhalin, as well as to build an LNG plant yielding 9.6
million cubic tons of liquefied natural gas annually. Putting the plant into
operation, Russia
will join the community of LNG producing countries.

By 2020 the problem of gasification for
Russian territories in Eastern Siberia and the Far East
will have been largely resolved. The development of the Unified Gas Supply
System in the eastern direction will allow us to combine gas resources of the
European and Asian parts of the country and will promote closer integration of
the region with the economic space of Russia.

Principal
vectors of the Russian gas industry

Traditionally, Russian domestic market has
always been of primary importance for Gazprom. Currently, the market is
undergoing a process of evolution, and the basic trend is liberalization.
Comprehensive measures targeted at the market liberalization are to bring about
enhanced efficiency of gas use in Russia and make the domestic market more lucrative for Russian gas
producers.

So far, Russia has only two traditional
export markets: the market of the Commonwealth of Independent States and the
European market.

For a number of CIS countries, such as Ukraine, Belarus,
and Moldova, as well as for
the Baltic countries, gas supplied from Russia is practically the only
source. In the CIS, the largest importers of Russian gas include Ukraine and Belarus. Being a reliable supplier,
Russia
can meet their demand for natural gas.

The European direction remains as the most
important one for us from the viewpoint of business prospects. We have been
supplying gas to Europe since 1973, and we
already consider our cooperation to be a good tradition. Russian gas was first
delivered there during the oil crisis, and that provided Europe
with an opportunity of an alternative supply from a highly efficient and
environmentally more attractive energy source. One can safely assume that the
European gas market has been established largely under the influence of
long-standing cooperation with Russia.

To date, Russia is the principal natural gas
supplier to the European market. During the past several years the Russian gas
share in the all-European consumption amounted to 25–28 per cent.

Russia is interested in strengthening international
cooperation in the energy sector upheld by constructive partnership of our
country with leading energy establishments, such as the International Energy
Agency.

We regard the Asia-Pacific vector as an
opportunity for real diversification of Russian export gas supply, in as much
as the Eastern direction is becoming a priority for the Russian gas sector. At
the APEC summit, Russian President Vladimir Putin pointed out the following: “The Asia Pacific Region is a traditional area of activities for us as a
Eurasian country bordering on many other states in the region. In Russia immense resources are concentrated in its
Asian part, in Siberia and the Far East, and
the APEC countries need those resources, primarily the energy ones.”

Now I would like to come to the analysis of
the possibilities of Russian producers in the development of the APR gas
market. Evidently, there is a dynamically evolving market here, and the demand
for gas is forecast to grow. For the development of the Asian economy, it is
essential to have a sufficient amount of energy, and gas is able to help
resolve the problem. It appears that for our closest neighbors, i.e. countries
of the North-East Asia, especially China,
Republic of Korea,
and Japan,
Russian gas may be of great interest in the foreseeable future.

Taking into account the existing energy
situation in the APR, we believe that the countries of the region are
attractive for Russia
both as export markets and as partners for joint development of the available
regional gas resources and implementation of gas transmission projects. An
example of this approach is participation of Gazprom in the Trans-Chinese
West-East Pipeline construction project.

The USA
may become an important partner for Russia in the energy sector. The
energy dialogue between the two countries brought about the start of deliveries
of Russian oil to the American market. As to the gas sector, the prospects are
similar. Under the current settings, Russia may consider supply of LNG
to the American market in the future. Nevertheless, taking the issue into the
area of practical solutions will to a large degree depend on the demand and
supply on the global energy resources market. In principle, the unique fields of
Yamal and northern seas shelf provide a basis for implementation of LNG
production and processing into liquid motor fuel for export.

No further improvement of Russian gas
positions on the export markets is possible without diversification of routes
and methods of gas transmission. It should be remarked that new transmission projects
in the Western direction carried out or scheduled for implementation by Gazprom
do take this factor into account.

In 2003, a gas pipeline from Russia to Turkey
across the Black Sea was put into operation.
The Blue Stream project covered the South-East segment of the European gas
market, thus creating prerequisites for further expansion of the Russian exports
in that particular direction. Many experts had doubted the very possibility of
constructing a gas pipeline on depths of up to 2,150 meters in an
aggressive hydrogen sulfide environment of the Black Sea.
Nevertheless, the challenge was met without any negative consequences for the
environment of the Black Sea basin.

Currently, construction of the Yamal – Europe gas pipeline is at its completion stage; the route
is oriented towards the Central European countries.

The North European Gas Pipeline will be
another major project that Gazprom intends to implement in the second half of
this decade. For Russian gas, it is going to be a radically new export route to
Europe directly connecting gas transmission networks of Russia with the
all-European network. The project implementation will promote further
integration of Russia
into the European economic space. The project includes construction of offshore
branch pipelines for gas supply to Finland,
Sweden,
and other countries.

Owing to construction of new gas export pipelines
complementing harmoniously the Unified Gas Supply System in the West, Russia extends
its potential of supply to the entire European market. As a consequence, the
resources of Western Siberia and northern seas shelf are oriented towards the
markets of the European part of Russia,
CIS, Europe and, further on, following
construction of LNG plants, to the US East coast.

While developing the Eastern regions of the
country, diversification of routes should be within a set of priorities in the
export policy. Thus, supply of Eastern-Siberian gas for export can be oriented
towards the People’s Republic of China
and the Republic
of Korea. In future, gas
supply routes from Sakhalin via trunklines can be of interest for Japan and South Korea. Gas reserves of the
northern part of the Far East may become of interest for consumers on the West
coast of North America.

For Russia and for Gazprom in particular,
advanced technologies open up new vistas for use of hydrocarbon raw materials.
That concerns the development of the Russian petrochemical and gas-chemical
industry, as well as some sectors that are new for Russia, such as implementation of
projects for synthetic liquid fuel production.
Production of diesel fuel and naphtha that are more environmentally friendly
than oil products can promote efficient development
of gas fields in the coming years, opening up for Gazprom new niches on the
domestic and export markets.

Prospects
for development of Gazprom as an international, socio- and eco-responsible
company

One of the overall objectives of the economic
strategy for Gazprom is to increase its capitalization and investment
attraction. The strategy is implemented through liberalizing Gazprom’s stock
market, leveling of its stock prices in Russia and abroad, rendering a
possibility to raise foreign participation in the Gazprom authorized capital up
to 20 per cent, facilitating the procedure of its share purchase and sale, and
publishing reports according to international standards. This is facilitated by
approval of the Company’s Corporate Governance Code, which is targeted at
efficient protection of the rights and interests of investors, transparency in
decision-making, professional and ethical responsibility of Gazprom officials
with respect to the shareholders, extension of information transparency, and
development of business ethical standards.

In 2002, the
Company succeeded in meeting its investment program targets. The overall amount
of investments in 2002 reached USD 5 billion. As far as Gazprom-issued
securities are concerned, the recent successful bond issue in Europe
showed a considerable demand for them.

While elaborating its investment programs, Gazprom
is guided by the following principles:

Guaranteed gas supply to consumers in Russia and
elsewhere;

Development of top-priority core business
activities;

Further cost-reduction;

Improvement of the system of investment
project management and increasing project efficiency;

Protection of the environment.

As far as
long-term objectives of Gazprom’s investment policy are concerned, top-priority
strategic investment objectives should include the Yamal
Peninsula and the Nadym-Pur-Taz region
in Western Siberia, as well as Russian East gas provinces and the Barents Sea offshore.

New gas transmission
projects set forth by the Company draw attention of potential foreign partners.

While developing the reserves in Eastern
Siberia and the Far East, we would like to
welcome APR countries and their companies among our partners. To date, Mitsui,
Mitsubishi, and Sodeco (Japanese companies) and ONGC (an Indian company) are working
in Sakhalin; however, more intense
participation of businesses from APR countries in the establishment of the gas
complex in the Russian East is bound to bring about still greater end results.

Being the world’s
largest gas company and a leading Russian corporation, Gazprom fully recognizes
its responsibility in terms of meeting the environmental problem as one of the
global problems confronting mankind.

During the past three years, the amount of
polluting emission into the air and water has been dramatically cut, and
efforts are made at reclamation of the lands disturbed as a result of the gas
industry activities. Gazprom has been dealing with the problem of utilizing
industrial and domestic waste both in remote gas producing settlements and in
major cities of the Russian North.

To date, Gazprom has posed a strategic goal
for itself: rendering environmentally friendly all the production stages,
including field exploration and development, hydrocarbon raw materials transmission,
storage, processing and distribution.

The Company has set up and is executing a
special ecological strategy, the basic content of which includes reduction of
the direct impact of production on the environment, rational use of natural
resources, and improvement of the social and environmental situation.

For that purpose, Gazprom has already
developed and is implementing a geo-ecological monitoring system for the
principal technological processes.

A considerable amount of data is gathered
using aerospace subsystems.

Within the concept of Gazprom, being an
eco-responsible company, intense work is done on the use of natural gas as
motor fuel. Jointly with major foreign firms and organizations, Gazprom takes
part in R&D projects for implementation of environmentally clean
technologies.

The Company’s further strategic plans in
Yamal and Eastern regions of the country have a strong ecological component
aiming at preservation of unique natural systems in those areas.

In
conclusion, let us emphasize once again the role of Gazprom for the Russian
society and the world gas industry. Our world’s largest resource base, Eurasia’s
largest trunkline network, the balanced development strategy, our abilities in
negotiating with investors, and compliance with the accepted standards in
environmental and labor protection areas give grounds to regard Gazprom as a
national asset and an eco- and socio-responsible company. Gazprom intends to
remain the leader of the Russian fuel and energy sector and the Eurasian gas
market.

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